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Summary:

Deloitte predicts that in 2011 social networks are likely to surpass the breathtaking milestone of one billion unique members. Also, they ma…

Deloitte predicts that in 2011 social networks are likely to surpass the breathtaking milestone of one billion unique members. Also, they may deliver over 2 trillion advertisements.

Yet the advertising revenues directly attributable to social networks may remain relatively modest compared to other media, at least in the short term.

With per member annual advertising revenue of about $4, that implies total 2011 advertising revenues of about $5 billion

Despite social media’s large and growing audience, its advertising revenues still represent less than one percent of the worldwide advertising spend total. Other sources of social network revenues, such as payments systems and e-commerce, might exhibit faster growth.

In 2011, it is likely that social networks’ long-term market value will continue to polarize opinions. Some view social networking as the technology sector’s “next big thing”, promising even greater rewards than the decade-old phenomenon of search advertising. Others compare social networks to the dot com bubble and argue that monetizing their users at dollar levels similar to online search has not yet been demonstrated.

Deloitte’s view is that the advertising revenues from social networks in 2011 are likely to be very significant in absolute terms: total industry revenues of $5 billion dollars and year-over-year growth of 40 percent are impressive numbers; individual companies may experience even higher growth rates.

Yet revenues on a per-subscriber basis are unlikely to match search or traditional media in the next year or two. Also, advertising rates, measured on a CPM (cost per thousand impressions) basis, are likely to remain low compared to other forms of online advertising as well as traditional media.

Nevertheless, thanks to a low cost base, social networks might still achieve impressive gross margins despite their relatively low revenues-per-user – particularly when compared to the traditional media companies they are competing against. A social network’s cost of content is close to zero since it merely provides the infrastructure, while its users and third party app developers provide all the content.

An assessment of social networks’ potential hinges on three metrics: subscriber growth, time spent on the network, and CPMs. Many social networking companies have been recording impressive gains in some of these metrics, but it is worth examining how much additional growth they can achieve…

When social networks attain the billion unique user milestone, nearly half of one global user base – computer-based Internet users – may be signed up by year-end 2011. This could put a ceiling on future growth if global Internet adoption continues to expand at the pace that consensus analysts expect: it might be increasingly difficult for social networks to sustain their impressive subscriber growth trajectories.

Mobile data might offer a better opportunity, particularly in developing countries where mobile penetration continues to rise steadily: there are far more global mobile users than those with access to computers. However, delivering display advertising to mobile phones at volumes and prices sufficient to create a significant multi-billion dollar business may not be likely in 2011. In 2010, mobile advertising revenues for the UK – the largest market in Europe – were only about $40 million. As smart phones and 3G networks become more widespread, the base of active social network users should rise accordingly.

Social networks’ growth trajectory is often compared to that of paid-for search, which in just 15 years grew from almost nothing into a $30 billion plus market that continues to expand. However, a decade ago broadband penetration in most countries was still in the single digits and some markets had no broadband service at all. The growth of search was at least partly fueled by significant growth in online use – a trend that social media has already capitalized on.

If social networks’ advertising revenues are only worth $4 billion in 2011 with half the potential user base already signed up, or if future growth is largely restricted to the low-value mobile ad market, most of the upside for social networks would need to come from increased time spent on the network, or from improved CPM metrics.

The amount of time spent on social networks rose sharply in 2010. In fact, according to one analysis, a popular social network enjoyed a 66 percent increase between Q3 2009 and Q3 2010. Yet even if the time spent on social networks grows by a factor of three, that might not necessarily translate into a threefold increase in advertising revenue. Increasing inventory could cause CPMs to fall even further.

If there are limits to audience growth and time spent, then the burden would primarily fall on CPM to drive revenue growth. Social networks’ understanding of individuals’ backgrounds, preferences, social groups, activities, and behaviors are without equal. There have been hopes that this would enable social networks to deliver superior advertising results: but paradoxically, social network CPMs remained among the lowest of all forms of online advertising.

That could well change, as the ability to mine the myriad data or social networks may find new business models that allow for much higher advertising revenues, but for 2011 it is difficult to find the levers that would cause social network ad revenues to accelerate from their already rapid pace.

Perhaps the vastness of social networks’ repository of user information is itself a limiting factor; as of 2011, it remains a challenge to economically extract useful insights from the volumes of user data that social networks generate. The billions of stated “likes” may not all necessarily signal an intent to purchase. Also, in 2011, as in previous years, privacy concerns may constrain the ability to collect the most valuable data. Nevertheless, once social networks figure out how to rapidly and economically analyze their data, and to monetize the billions of recommendations made, a new seam of valuable customer insights will be available to mine and exploit.

Bottom line

In 2011, the story of social networks will continue to be written with no clear conclusion in sight. Social networks remain an emerging business founded on innovation; yet they have already achieved levels of market acceptance that might have seemed inconceivable just a few years ago. The question now is whether social networks can sustain their growth trajectory and find better ways to monetize value.

Even if social networks 2011 ad revenues only meet industry forecasts, they may still have other valuable ways to generate revenue. For example, they could serve as a payment platform for the hundreds of thousands of application providers in their ecosystem. Or they could adopt a blended e-commerce department store model, where they charge for online floor space and earn a commission on any sales. Yet in 2011 these additional revenue streams, although very profitable, are unlikely to surpass advertising in importance to social networks

If low CPMs are expected to be the norm, social networks should consider how media agencies – particularly those paid by commission – are likely to respond. Agencies might conclude that commissions based on modest CPMs are less attractive than other potential clients, and could begin pushing other forms of advertising. Or they might decide to sell high value advisory services, such as public relations and reputation management, to help a brand manage its presence on social networks.

Advertising firms and their clients will likely need to expand their use of social media to protect their image and reputation in a world increasingly influenced by personal opinions and grassroots communications. Studies have shown that word-of-mouth feedback and peer reviews exert tremendous influence on purchasing decisions; in fact, one survey found that up to 78 percent of people trust peer recommendations, compared to just 14 percent who trust advertisements.

Throughout 2011, it seems likely that the forecast for the social network sector will continue to be promising, but unclear. As more information is released and as business models become more developed, all of advertisers, competitors and analysts will get a better picture of the future potential of this industry.

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  1. SMM is very good for attracting so many people to profile but is that good enough to generate revenue for websites. Because intentions of Social Media users is definitely not buying or taking services.

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